All this turmoil adds up to make Italy the "biggest headache" for
the rest of Europe, according to research from staff at Citi.

"While Italy needs Europe to get out of the woods, Europe might
struggle to survive with a key partner lost in the woods. Five
years into the crisis which led to the ousting of Silvio
Berlusconi, Italy is still Europe’s biggest headache. And the
headache might intensify in the coming months should Renzi’s
government collapse."

In their latest analysis of the situation: "Talking About Italy
Flirting with the Past: Is Italy Europe’s Sleeping Risk?" — Citi
analysts led by Mauro Baragiola, Tina Fordham, Jonathan Stubbs,
and Giada Giani, discuss Italy in depth, covering everything from
the luxury goods sector in the country, all the way to the
massive problem the country has with debt. Within the note, Citi
staff discuss the five big issues that make Italy Europe's main
"headache."

Italy has a public debt of more than 131% of GDP, and if that
starts to go sour, things could get real ugly, real quick. As
Citi notes: "The euro might come under renewed pressure on
Italian public debt. And European partners might not want to have
Italy run by parties targeting debt restructuring."

Second, and equally important, is
the rising swell of populist, anti-EU sentiment in the
country, which Citi fears, could help spread this ill-feeling
across the continent, especially if Matteo Renzi's government
collapses and the Five Star Movement finds its way to power. As
Citi notes, this is a big switch, given that the country's
citizens have traditional been big Europhiles.

Here is the extract (emphasis ours):

"Whereas Italy is a founding member of the European Community and
Italians used to be among the biggest supporters of European
integration, the degree of EU/euro scepticism in Italian
politics and voters is on the rise and relatively
high."

"After Brexit, Vox Populi is spreading across the Continent,
European institutions might not shrug off Italians’ criticism
(also considering that Italy’s experience in the Eurozone has
been somewhat disappointing – with 2015 real GDP per person lower
than in 1999) – providing an efficient populist message across
Europe for the many anti-establishment parties."

Another issue that Europe faces when it comes to Italy is the
fact that many big institutions have substantial operations in
the country, and should its stagnant economy get even worse, big
companies could start to feel the pinch.

"Italy is a poor state but a rich country: whereas public debt
might provide a headache for the European institutions, a further
collapse in the Italian economy might be a big blow for the
income statements of the many global companies that still have
large B2B and B2C operations in Italy," Citi argues.

One of the issues we have highlighted the most about the Italian
crisis in recent months is the country's ongoing banking
crisis, which centres around the huge number of bad loans granted
by banks in the country, particularly its third largest lender,
Monte dei Paschi di Siena.

"Although a banking crisis in Italy should be theoretically
ringfenced and have little impact on banks outside Italy,
collateral damage cannot be ruled out given the systemic
risk of the Italian banks as well as large Italian
operations of European banks. EBA tests and the IMF recently
highlighted some weaknesses in other European banks which
might struggle to remain immune from a confidence crisis in
Italy."

Finally, not only is Italy a political and an economic worry for
Europe, it also has the potential to turn into a geopolitical
headache, given its location on the fringes of Europe, and in a
key region in turns of mass immigration from the Middle East.

"Given the situation in Libya, Italy might increasingly become
the soft belly of Europe in fighting illegal immigration," Citi
argues, adding that "Italy might have somewhat recovered the
strategic geopolitical status it enjoyed during the Cold War as a
crossroad between West and East."